The Housing Storm May Not Be Over

Posted by Tom Lindmark on June 23rd, 2009

I was all set to write an upbeat post about how a story in the WSJ was another indication that the housing market was slowly getting better when an article in the Arizona Republic stopped me dead in my tracks. Let me explain.

First, the WSJ article reports that some homebuilders are starting to acquire land again. It isn’t massive amounts, rather they’re buying or trying to buy land that banks have taken back in foreclosure proceedings. Here’s what’s going on:

U.S. home builders, long burdened with excess holdings of land, now are shopping for more of it.

Though it will take years for builders to make use of all the land they bought at inflated prices during the housing boom, some are starting to see irresistible values for finished lots — land ready for building, with streets, sewers and other improvements in place — in prime locations. Many of these lots are owned by banks that acquired the property through foreclosures.

Ivy Zelman, chief executive officer of Zelman & Associates, a housing-research firm, said home builders have plenty of land already, but it is mostly in the wrong places, “beyond the ‘burbs,” far from where most people work. In prime areas, though, builders have dwindling supplies of lots and so feel the need to buy more. Demand for lots in top-tier locations appears to be increasing, particularly in Phoenix, near Washington, D.C., and in parts of California, she said.

Meritage Homes Corp. recently paid about $2.9 million to California Bank & Trust, a unit of Zions Bancorp, for a loan backed by 81 finished lots in the Quail Springs subdivision of Chandler, Ariz., a suburb of Phoenix, said Steve Davis, chief operating officer of the home builder. Meritage then foreclosed on that loan to gain control of the lots and expects to begin offering homes there within a few months, Mr. Davis said.

The price for the lots works out to roughly the costs of the improvements, including roads and sewers, already in place, Mr. Davis said. In effect, Meritage is getting the land for free and paying only for the improvements, he said. A spokeswoman for California Bank & Trust confirmed the transaction.

The lots Meritage is buying in Chandler would have cost about three times as much in 2005, said Howard Weinstein, a land broker at Land Advisors Organization in Phoenix. The average cost of a lot of 6,000 to 7,000 square feet in the Phoenix suburbs of Gilbert and Chandler soared from about $36,000 in 2001 to a peak of $120,000 in 2005. Since then, the cost has sunk to $35,000, Mr. Weinstein said.

Chandler is attractive because it is home to major semiconductor plants, providing high-wage jobs, and is more affordable than nearby Scottsdale, Mr. Davis said. Meritage expects to build homes priced at $180,000 to $200,000 on the Quail Springs lots, he said.

So far so good, right? Well it was for me, you know a revival of animal spirits, faith in the future and all of that. Then I stumble across the Arizona Republic article.

Now before I get there indulge me for a moment. This paper is like so many community or regional news outlets. They know who butters their bread and in Phoenix no one spreads the advertising butter thicker than the real estate industry. The last few months the paper has pretty much been on the “green shoots” meme when it comes to real estate. That’s what made this article so astounding.

Thomas Kelly explains the foreclosure process to those outside the banking industry by likening it to a tube.

“You get put in the tube when you’re 90 days late, and you might come out the other end of the tube six months later,” said Kelly, spokesman for JPMorgan Chase & Co.

What Kelly’s analogy doesn’t explain is how, for the past three years, thousands more Phoenix-area property owners have been entering the tube each month than coming out of it.

At present, the system is backed up with more than 45,000 “pending” foreclosures, up from about 2,300 in June 2006, according to a historical analysis by the Information Market, a Phoenix research firm.

Most experts expect pending foreclosures to increase even more before leveling off sometime within the next 12 months.

For a little perspective on that 45,000 number, consider that in the last three years in Phoenix about 73,000 homes have been taken back by the lender. Take it a step further and ponder the fact that there should be about 5,000 foreclosures completed this month which will be second only to the 5,240 foreclosures recorded in February. Want another statistic? As of Friday 5,700 pre-foreclosure notices have been served.

I’ll paint an even bleaker picture for you. Here is an historical view:

Month Pending Foreclosures

June 2009 45,709

Dec 2008 30,812

June 2008 23,870

Dec 2007 12,888

June 2007 6,538

Dec 2006 4,140

June 2006 2,311

I’ll let you read the entire story and I recommend that you do so. Pay particular attention to the end in which the author talks about the impending commercial real estate bust.

So, if you look at these numbers you’re inclined to ask whether the builders are living in some sort of parallel universe. Do they know something we don’t or have they been so battered they’ve lost the ability to reason. I don’t know the answer but the numbers don’t add up.

I want to believe that the homebuilders are seeing rays of sunshine where I can only pick out storm clouds. The problem is that there seems to be no end yet to the foreclosure tsunami (hows that for mixing metaphors). I’ll think about this a bit more and probably do a follow-up tomorrow. In the meantime I’m open to your analysis.